There has been a lot of talk about Self-Managed Super Funds in recent years. You will have noticed there has been mixed media coverage about whether SMSFs are a good choice for managing the average person's superannuation.
Your superannuation choices are crucial and the decisions you make now could result in a difference-positive or negative-of many hundreds of thousands of dollars when it comes time for you to retire.
In this article we'll address the pros and cons of using a Self-Managed Super Fund for your superannuation, but first let's clarify what an SMSF is…
What is a Self-Managed Super Fund?
A simple way of describing a Self-Managed Super Fund (SMSF) is that it's a special type of bank account that has very strict rules applied to how you can use it, and it allows you to put your superannuation contributions into that fund-your own SMSF-rather than into an industry or retail superannuation fund.
Having your own private super fund allows you to choose the investments and the insurance, and you manage every aspect of the fund yourself, with assistance from specialist SMSF advisors, administrators and auditors.
You can have up to four members in your SMSF and most have two or more family or friends as members. Members are called 'trustees' of the fund - or you can have a 'corporate trustee' which is where you set up a company to act as the trustee. In this case, the members must also be directors of that company.
There's more to it, of course, but that's it in a nutshell.
Is an SMSF right for you?
The decision to set up a Self-Managed Super Fund should not be taken lightly or be made on a whim because even though it gives you control over how your superannuation contributions are invested, it involves additional complexity and annual compliance costs and professional support fees.
For those reasons, it's best to seek personalised advice specific to your situation before making the decision. We can guide you here.
Before you even take that step though, here's a list of considerations to help you make a preliminary assessment of whether an SMSF may be a fit for you:
Do you want:
- More control over how your money is invested?
- To stop paying fees to super fund managers who are not working hard to earn the management fees you pay them each year?
- More flexibility in how you pass on your wealth?
Do you have:
- Experience and knowledge in how to invest your super funds?
- Time to actively research and manage your investments?
- Attention to detail for keeping up with SMSF rules and regulations?
- At least a $200K superannuation balance to justify the annual SMSF expenses and make it cost effective for you? (The recommended minimum super balance to achieve before setting up an SMSF can vary, depending on the circumstances and objectives.)
6 pros of having an SMSF
Some of the advantages of setting up and running your own Self-Managed Super Fund include:
- Investment choice
Having an SMSF gives you the widest range possible of investment options because the decisions are up to you, within certain rules of course. As a trustee you can directly access shares, cash accounts, term deposits, real estate, unlisted assets, international markets and even collectables.
- Tax strategies
Concessional (i.e. lower) tax rates apply to SMSFs, just as they to do industry and retail super funds:
- Accumulation phase: Tax on investment income is capped at 15%
- Pension phase: There is no tax payable, not even Capital Gains Tax.
The government wants you to be a self-funded retiree to ease the burden on the welfare system as our population ages and more people enter retirement. The fewer people on the pension the better, and so the government's concessional tax rates on superannuation will help you accelerate your path to achieving that.
We can guide and help you implement the tax strategies that can grow your super savings and reduce tax payments as you transition to retirement.
Each member of an SMSF has the flexibility to run their own ideal mix of accumulation and pension accounts. As market conditions, superannuation rules or your own personal circumstances change, you can quickly adjust your investment strategy because you are in control of the decisions.
SMSF trustees appreciate having complete transparency over where their money is invested, how their investments are performing and how they are being taxed. If you have a strong investment preference for one class of asset over another-for example, for property instead of shares-or you want to invest in mainly sustainable and ethical investments, you can. You have complete visibility on what's happening in your SMSF and how it is performing.
Each year an SMSF must:
- lodge an annual tax return (= SMSF administration accounting fees)
- be audited by a registered SMSF auditor (= SMSF audit fees)
- pay compliance lodgment fees (= Australian Tax Office (ATO) fees)
The ATO's SMSF fees are fixed and do not vary based on the SMSF's fund balance.
SMSFs become more cost-effective as the fund balance grows and, conversely, SMSFs are not cost-effective when the super balance is too small; this is because the professional fees and lodgment costs are too high as a percentage of the fund's balance.
It's important you first have a large enough super balance to justify setting up an SMSF. We can guide you on that decision.
- Consolidate superannuation assets
To reduce the costs of running a Self-Managed Super Fund, as a trustee you can combine your superannuation assets in an SMSF with up to three other members such as partners or family members.
Combining super accounts creates a larger fund balance which, in addition to increasing the fund's assets and investment opportunities, means there's only one set of fees.
Of course, there are potentially complex relationship issues to consider before doing this.
5 cons of having an SMSF
Like anything in life, there are pros and cons to each approach.
Following are risks that are important to understand before you set up an SMSF because the risks don't apply to industry and retail super funds.
As we covered above, if your super balance is not large enough, the costs involved in setting up and managing your own SMSF cannot be justified. So whether the costs are a pro or a con depends entirely on the size of your superannuation balance.
- Legal responsibilities
You are responsible for managing your SMSF and this includes complying with important duties, laws and rules. Not complying with these can result in significant penalties.
- Fraud risk
Members of Self-Managed Super Funds cannot go to a complaints body in the event of fraud. Members of industry and retail super funds, on the other hand, can resolve disputes in a timely and low-cost manner, certainly compared with taking legal action.
There are measures you can put in place to ensure you're not an easy target for fraud, but if fraud does occur, it could result in costly and time-consuming legal action for the SMSF members.
- Insurance cover
Adding life and disability insurance cover to your standard super fund membership is straightforward, but for an SMSF member it may be more difficult or expensive to secure.
- Winding up costs
If your circumstances changed significantly-for example you experience bankruptcy, a relationship breakdown, a business failure, a loss of mental capacity, or you become a non-resident-a reduced superannuation balance might cause you to want to, or have to, wind up your SMSF.
It's important you are aware of the winding up costs that may apply and put in place a contingency plan for this potential risk.
What should you do next?
As you can see, while the control and transparency that an SMSF can give you over your super is appealing, there's more work, complexity and potential risk.
On the flipside, running your own super fund can be a very rewarding experience and give you the opportunity to generate better returns in your preferred types of assets.
If you'd like to have a chat about whether your combined super balance, current situation and personal investment preferences make an SMSF a good for you or not, get in touch with us for an initial chat.
There's no cost or obligation for this initial discussion.